Buying a property that needs a bit doing to it and giving it a bit of TLC and a quick refurb can be one of the easiest and most satisfying ways of making a profit in property. But before you can begin to enjoy the benefits of forced appreciation, you must first tackle the complexities behind financing your project.
Many buy to let lenders are reluctant to advance mortgages on properties
which require even minor works of repair, modernisation or improvement. The
rationale behind this is that in lending on a property, they are taking the potential
income into account – and they want to see that income coming in as soon as
possible. For this reason, many lenders will insist that a property is in a “lettable” condition from day one.
I have seen many instances where buy to let loans have been declined based on valuers’ comments for what would usually be considered fairly trivial reasons. However, the good news is that some lenders will lend on properties requiring a
limited amount of renovation or refurbishment by way of a light refurbishment loan.
Unless you are a cash buyer or are choosing a property which would be deemed lettable immediately, a light refurbishment loan might be the finance route for you. Let’s consider what this is.
The definition of “light refurbishment” is somewhat vague but it essentially covers
situations where a property requires a cosmetic upgrade and perhaps minor
improvements, such as a new kitchen or a new bathroom.
With this type of loan, the lender will advance for example 70%, depending upon their LTV of the purchase price of the property or the value (whichever is lower), and will usually retain a sum of money equivalent to the cost of undertaking the works.
At the time of the initial mortgage application, the valuer will be asked to provide an
opinion of the value of the property in its current un-refurbished condition, and also an opinion of the likely value of the property following completion of the works. When the borrower informs the lender that the works have been completed, the valuer re-inspects the property, and as long as the valuer is happy with the standard of the works, the sum of money retained to cover the cost of the works will be released.
Following on from this, the mortgage will be re-calculated to be 70% of the value of the property after improvement, and any extra equity resulting will be released at the same time.
Of course, there are pros and cons with using light refurbishment loans. The first disadvantage is that only a few buy to let lenders offer a light refurbishment
or limited refurbishment loan, so there’s not much choice with regard to products.
Secondly, loan to value ratios are limited, with most typically around the 70% LTV mark. This can be compared with the best LTVs available for standard buy to let
mortgages, which at the moment include 85% offered by Kent Reliance, and 80% by The Mortgage Works (for existing customers), Mortgage Trust and Saffron.
Another potential disadvantage, depending on what you buy and where, is that most
lenders have relatively high minimum valuations for their light refurbishment
products. Paragon has the lowest at £75,000, and Saffron and Kent Reliance only
lend on properties over £100,000. This figure is fairly typical.
Of course, each lender also has a slightly different idea of what comprises a light refurbishment but a fair summary is Paragon’s definition, which describes their limited refurbishment scheme as being for a property that is “currently habitable but where minor works would enhance the overall appeal to the market and its potential rental income. Minor works might typically include the replacement or refurbishment of kitchens and bathrooms, renewal of services or decorative attention. The scheme is not for works that require planning permission, permitted development rights or building regulations approval, and should not involve any major structural works to the property”.
Paragon is the main lender although the terms of their product make it very limiting.
Others include Shawbrook, Kent Reliance, Aldermore and the Saffron Building
Society, as well as Precise who offer a “bridge to let” facility whereby they bridge the refurbishment and then the loan can be swapped to a more traditional buy to let type loan once the refurb is completed.
There are many other products available, each with their own pluses and minuses so it is worth speaking to a mortgage advisor to understand the complexities and identify which one would be best for you. For example, it may turn out that it would be better to opt for a more expensive product initially, if you intend to refinance down the line and then switch to a cheaper product like a normal buy to let product.
Playing with the figures and seeing which combination works best should all be part of your due diligence and sometimes it can pay to work with an expert who can help navigate the finances to your advantage.
Here’s to successful property investing.
Peter Jones B.Sc FRICS
Chartered Surveyor, Author & Property Investor
PS… If you want to guarantee a profit, you need to know how to find the right property, how to plan the project, how to cost the refurb and budget properly, how to put the right ‘power team’ in place, and how to exit. My best selling “The Successful Property Renovator’s Workshop” takes you through this mind field and guarantees you a profit every time. Take a look at: http://www.thepropertyteacher.co.uk/720/